Returns On Capital Signal Tricky Times Ahead For Shandong Xinjufeng Technology Packaging (SZSE:301296)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Shandong Xinjufeng Technology Packaging (SZSE:301296) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Shandong Xinjufeng Technology Packaging:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.095 = CN¥234m ÷ (CN¥3.3b - CN¥816m) (Based on the trailing twelve months to March 2024).

Thus, Shandong Xinjufeng Technology Packaging has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 4.7% generated by the Packaging industry, it's much better.

Check out our latest analysis for Shandong Xinjufeng Technology Packaging

In the above chart we have measured Shandong Xinjufeng Technology Packaging's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Shandong Xinjufeng Technology Packaging .

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Shandong Xinjufeng Technology Packaging, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Shandong Xinjufeng Technology Packaging's ROCE

Bringing it all together, while we're somewhat encouraged by Shandong Xinjufeng Technology Packaging's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 59% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Like most companies, Shandong Xinjufeng Technology Packaging does come with some risks, and we've found 1 warning sign that you should be aware of.

While Shandong Xinjufeng Technology Packaging isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com